Estimated Weighted Least
Squares
Profits and Market Structure for
Highly Advertising Companies
J.M. Vernon and R.E.M. Nourse (1973). “Profit Rates and Market Structure of Advertising Intensive
Firms,” The Journal of Industrial Economics, Vol. 22, #1, pp. 1-20
Data Description
• n = 57 Large Advertising Intensive Firms
• Dependent Variable: Equity Profit (PE)
(net income/shareholder equity) averaged over 1963-1968
• Independent Variables (Subset of the original paper’s):
 DCR = 1 if firm’s average market Concentration Ratio ≥ 50, 0
otherwise (1  firm is in highly concentrated product areas)
 AS = Average INDUSTRY Advertising/Sales Ratio
 CAS = FIRM Advertising/Sales Ratio
 LRSIZ = 1/ln(ASSETS)
 SIZ = ASSETS (Used to estimate variance heterogeneity)
• Heterogeneity Model (Larger firms ≈ many small firms):
V   i    i2   SIZi e
2
    ln SIZ   
 ln  i2   ln 
2
i
 0
Data
Firm
Alberto Culver
American Bakeries
American Sugar
Anheuser-Busch
Armour
Avon Products
Campbell Soup
Helme Products
Beatrice Foods
Borden
Bristol-Meyers
Brown-Forman Distillers
Del Monte
Associated Brewing
Faberge
Fairmont Foods
Falstaff Brewing
General Mills
General Foods
Gerber Products
Green Giant
G. Heileman Brewing
Helene Curtis
Heublein
George A. Hormel
Hygrade Food Products
Hershey Foods
Keebler
Kellogg
PE
0.30
0.09
0.11
0.13
0.09
0.37
0.13
0.13
0.16
0.12
0.30
0.17
0.11
0.03
0.28
0.10
0.08
0.14
0.17
0.17
0.10
0.15
-0.02
0.19
0.10
-0.05
0.19
0.04
0.22
DCR
0
1
0
1
0
0
1
1
1
1
0
1
0
1
0
1
1
1
1
1
0
1
0
1
0
0
1
1
1
CAS
0.280
0.004
0.005
0.026
0.004
0.015
0.041
0.010
0.008
0.011
0.164
0.079
0.017
0.042
0.083
0.001
0.040
0.088
0.064
0.020
0.041
0.141
0.046
0.104
0.007
0.002
0.002
0.029
0.101
AS
0.165
0.009
0.002
0.033
0.002
0.170
0.026
0.032
0.017
0.013
0.129
0.106
0.022
0.033
0.170
0.004
0.033
0.078
0.041
0.029
0.020
0.033
0.170
0.071
0.002
0.002
0.059
0.012
0.142
LRSIZ
0.2769
0.2295
0.1787
0.1694
0.1568
0.1848
0.1617
0.2970
0.1775
0.1490
0.1775
0.2082
0.1664
0.2711
0.2354
0.2263
0.2186
0.1710
0.1467
0.2140
0.2153
0.3693
0.2970
0.2222
0.2233
0.2463
0.1952
0.2378
0.1846
SIZ
37
78
269
366
588
224
485
29
280
822
280
122
408
40
70
83
97
347
914
107
104
15
29
90
88
58
168
67
225
Firm
Kraftco
Libby, McNeil & Libby
Oscar Mayer
National Biscuit
Pabst Brewing
Pet
Peter Paul
Philip Morris
Procter & Gamble
Quaker Oats
Rath Packing
Revlon
Riviana Foods
Royal Crown Cola
Helena Rubinstein
Joseph Schlitz Brewing
Shulton
Standard Brands
Stokely-Van Camp
Swift
Tasty Baking
Tobin Packing
United States Tobacco
Ward Foods
William Wrigley
American Brands
Liggett & Meyers
R.J. Reynolds
PE
0.12
0.04
0.11
0.18
0.13
0.10
0.16
0.15
0.16
0.12
-0.17
0.22
0.12
0.27
0.09
0.10
0.16
0.16
0.10
0.05
0.16
0.08
0.16
0.06
0.14
0.13
0.10
0.19
DCR
0
0
0
1
1
0
1
1
1
1
0
0
0
1
0
1
0
1
0
0
1
0
1
1
1
1
1
1
CAS
0.021
0.029
0.032
0.020
0.022
0.012
0.081
0.106
0.104
0.062
0.031
0.050
0.012
0.154
0.056
0.044
0.065
0.030
0.024
0.003
0.022
0.084
0.038
0.011
0.134
0.078
0.088
0.109
AS
0.015
0.020
0.002
0.022
0.033
0.019
0.060
0.114
0.095
0.069
0.002
0.170
0.014
0.093
0.170
0.033
0.170
0.048
0.023
0.002
0.009
0.002
0.036
0.013
0.117
0.102
0.099
0.101
LRSIZ
0.1477
0.1862
0.2191
0.1685
0.1988
0.1848
0.3107
0.1588
0.1383
0.1830
0.2643
0.1926
0.3189
0.3034
0.3235
0.1869
0.2423
0.1695
0.2051
0.1533
0.3338
0.3147
0.2569
0.2289
0.2127
0.1444
0.1644
0.1421
SIZ
870
215
96
378
153
224
25
542
1379
236
44
180
23
27
22
211
62
365
131
681
20
24
49
79
110
1019
438
1136
Ordinary Least Squares Regression and Correlations
ANOVA
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.6107
R Square
0.3729
Adjusted R Square
0.3247
Standard Error
0.0694
Observations
57
PE
DCR
CAS
AS
LRSIZ
Regression
Residual
Total
4
52
56
SS
0.1488
0.2503
0.3991
MS
0.0372
0.0048
F Significance F
7.7310
0.0001
Coefficients
Standard Error t Stat
P-value Lower 95%Upper 95%
0.1142
0.0406
2.8091
0.0070
0.0326
0.1957
0.0225
0.0193
1.1643
0.2496 -0.0163
0.0612
0.3985
0.2296
1.7358
0.0885 -0.0622
0.8593
0.6128
0.2099
2.9200
0.0052
0.1917
1.0339
-0.2434
0.1671 -1.4567
0.1512 -0.5787
0.0919
Intercept
DCR
CAS
AS
LRSIZ
PE
1.0000
0.1335
0.4715
0.5368
-0.1264
df
DCR
0.1335
1.0000
0.0875
-0.0902
-0.1033
CAS
0.4715
0.0875
1.0000
0.5929
0.1665
AS
0.5368
-0.0902
0.5929
1.0000
0.0266
LRSIZ
-0.1264
-0.1033
0.1665
0.0266
1.0000
While not all regression coefficients
are significant, there is evidence that
profits are higher for firms in highly
concentrated markets, with high
industry and firm advertising, and
higher assets. (Barriers of entry)
ln(e^2) versus ln(SIZ)
0
-2
-4
-6
ln(e^2)
-8
-10
-12
-14
-16
-18
2
3
4
5
ln(SIZ)
6
7
8
Estimated Heterogeneity Model and Firm Variances
V        SIZ e  ln    ln     ln  SIZ      0
Regression Model: ln  e   ln     ln SIZ   
i
2
i
2
 
2
i
i
2
i
2
i
Coefficients
Standard Error t Stat
P-value
Intercept -4.3924
1.2948 -3.3924
0.0013
ln(Siz)
-0.5274
0.2544 -2.0729
0.0429
2
i
^ 2
Estimated Model:  i  exp 4.3924  0.5274 ln SIZi   0.0012SIZi 0.5274
Firm
Alberto Culver
American Bakeries
American Sugar
Anheuser-Busch
Armour
Avon Products
Campbell Soup
Helme Products
Beatrice Foods
Borden
Bristol-Meyers
Brown-Forman Distillers
Del Monte
Associated Brewing
Faberge
Fairmont Foods
Falstaff Brewing
General Mills
General Foods
SIZ
37
78
269
366
588
224
485
29
280
822
280
122
408
40
70
83
97
347
914
V(e)
0.0018
0.0012
0.0006
0.0006
0.0004
0.0007
0.0005
0.0021
0.0006
0.0004
0.0006
0.0010
0.0005
0.0018
0.0013
0.0012
0.0011
0.0006
0.0003
Firm
Gerber Products
Green Giant
G. Heileman Brewing
Helene Curtis
Heublein
George A. Hormel
Hygrade Food Products
Hershey Foods
Keebler
Kellogg
Kraftco
Libby, McNeil & Libby
Oscar Mayer
National Biscuit
Pabst Brewing
Pet
Peter Paul
Philip Morris
Procter & Gamble
SIZ
107
104
15
29
90
88
58
168
67
225
870
215
96
378
153
224
25
542
1379
V(e)
0.0011
0.0011
0.0030
0.0021
0.0012
0.0012
0.0015
0.0008
0.0013
0.0007
0.0003
0.0007
0.0011
0.0005
0.0009
0.0007
0.0023
0.0004
0.0003
Firm
Quaker Oats
Rath Packing
Revlon
Riviana Foods
Royal Crown Cola
Helena Rubinstein
Joseph Schlitz Brewing
Shulton
Standard Brands
Stokely-Van Camp
Swift
Tasty Baking
Tobin Packing
United States Tobacco
Ward Foods
William Wrigley
American Brands
Liggett & Meyers
R.J. Reynolds
SIZ
236
44
180
23
27
22
211
62
365
131
681
20
24
49
79
110
1019
438
1136
V(e)
0.0007
0.0017
0.0008
0.0024
0.0022
0.0024
0.0007
0.0014
0.0006
0.0009
0.0004
0.0025
0.0023
0.0016
0.0012
0.0010
0.0003
0.0005
0.0003
Estimated Weighted Least Squares Estimator
WV
1/2
X* = WX
s2(e*)
0.04686828






 






1

0 



0 





1 

v n 
0
v1
1
0
v2
0
0
Y* = WY

βW  X* X*
V(Beta(W))
0.001348 -0.00024
-0.00024 0.000279
0.000136 -0.00097
-0.00113 0.000358
-0.00579 0.000471
T

INV(X*'X*)
0.02875755
-0.0050568
0.00289485
-0.024141
-0.1234965
1
0.000136
-0.00097
0.055311
-0.03346
-0.00243
X*'Y*
110.3155
74.28943
6.90501
8.104081
20.25089
T
X* Y*
-0.00113
0.000358
-0.03346
0.042812
0.000965
-0.00506
0.005955
-0.02076
0.007649
0.010046
-0.00579
0.000471
-0.00243
0.000965
0.029784
Beta(W)
0.1202
0.0066
0.0905
0.7948
-0.1993
0.002895
-0.02076
1.180133
-0.71396
-0.05183
-0.02414
0.007649
-0.71396
0.913463
0.020582
-0.1235
0.010046
-0.05183
0.020582
0.635478
Beta(W)
0.120169
0.006649
0.090453
0.794818
-0.19932
SE(B(W))
t
0.0367
3.2732
0.0167
0.3980
0.2352
0.3846
0.2069
3.8413
0.1726 -1.1550
t(.025)
2.0066
2.0066
2.0066
2.0066
2.0066
P-value
0.0019
0.6923
0.7021
0.0003
0.2534